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U.S. Supreme Court

United California Bank v. United States, 439 U.S. 180 (1978)

United California Bank v. United States

No. 77-1016

Argued October 4, 1978

Decided December 11, 1978

439 U.S. 180


The issue in this case involves the computation of the alternative income tax of a decedent's estate that had net long-term capital gains, a portion of which, pursuant to the decedent's will, was set aside for charitable purposes within the meaning of § 642(c) of the Internal Revenue Code of 1954. Under the provisions of the Code in effect during the years in question, taxpayers, including decedents' estates, with net long-term capital gains exceeding net short-term capital losses, paid either a "normal" income tax calculated by applying ordinary graduated rates to taxable income computed with a 50% capital gains deduction permitted by § 1202 or, if it was a lesser sum, the alternative tax calculated under § 1201(b). In 1967 and 1968, petitioners, executors of an estate, realized long-term capital gains from the sale of securities included in the residue; there were no short-term capital losses. Petitioners set aside a portion of the long-term capital gains for the benefit of a specified charity as directed by the decedent's will. In the fiduciary income tax returns for 1967 and 1968, petitioners sought to use the alternative tax, and, in computing this tax, excluded from the long-term capital gains the portion set aside for charity. The District Director disallowed the exclusion, without which the alternative tax was higher than the normal tax, with the result that the latter tax was due. Additional taxes were assessed and paid, and this suit for refund followed. The District Court allowed the exclusion, but the Court of Appeals reversed.

Held: The net long-term gains to which the alternative tax is applicable is reducible by the amount of the charitable set-asides in the years in question. Pp. 439 U. S. 187-199.

(a) While charitable distributions or set-asides by an estate are not within the conduit system applicable to capital gains passing to noncharitable beneficiaries under §§ 661(a) and 662(a) of the Code whereby an estate's distributable income to such beneficiaries is taxable to them, rather than to the estate, this does not mean that similar treatment may not be accorded to charitable distributions or set-asides deductible by the estate under § 642(c). Section 642(c) serves to extract income destined for charitable entities from an estate's taxable income, and thus chanrobles.com-red

Page 439 U. S. 181

supplies a conduit for charitable contributions similar to that provided by §§ 661(a) and 662(a) for income passing to taxable distributees. The express exclusion, pursuant to § 663, from §§ 661(a) and 662(a) of those amounts deductible under § 642(c) does not refute conduit treatment of such amounts, but, rather, such exclusion merely prevents a second deduction for charitable set-asides and recognizes as well that they are accorded separate treatment elsewhere in the Code. Pp. 439 U. S. 187-194.

(b) It is doubtful that Congress intended that an estate which set aside part of its capital gain for charity should pay a higher income tax than if the same portion of capital gain had been distributed to a taxable beneficiary, or that the burden of the extra tax should be borne by the charities themselves or by the noncharitable residual legatees. The former allocation would contravene § 642(c), which permits deduction of charitable set-asides "without limitation," and would indirectly offend the tax exemption extended to charities by § 501. And allocating the burden to the noncharitable legatees would result in taxation of the capital gain accruing to their benefit at an effective rate higher than the 25% ceiling that § 1201 was intended to impose on the taxation of net long-term capital gains. Pp. 439 U. S. 194-195.

(c) The legislative history of the 1954 Code is not incompatible with the general applicability of the conduit concept, and in fact clearly indicates that Congress sought rigorously to adhere to the theory that an estate or trust in general is to be treated as a conduit through which income passes to the beneficiary. Pp. 439 U. S. 195-196.

(d) A construction of the alternative tax that permits petitioners to exclude the charitable set-asides does not conflict with the decision in United States v. Foster Lumber Co., 429 U. S. 32. Pp. 439 U. S. 197-199.

(e) The principle that currently distributable income is not to be treated "as the [estate's] income, but as the beneficiary's," whose "share of the income is considered his property from the moment of its receipt by the estate," Freuler v. Helvering, 291 U. S. 35, 291 U. S. 41-42, survived in substance in the 1954 Code. To treat charitable and noncharitable distributions of capital gain differently for the purpose of computing the alternative tax under § 1201(b) "stresses the form at the neglect of substance," and "the letter of § 1201(b) must yield when it would lead to an unfair and unintended result," Statler Trust Co. v. Commissioner, 361 F.2d 128, 131. P. 439 U. S. 199.

563 F.2d 400, reversed.

WHITE, J., delivered the opinion of the Court, in which BURGER, C.J.,and BRENNAN, MARSHALL, BLACKMUN, and POWELL, JJ., joined. STEVENS, chanrobles.com-red

Page 439 U. S. 182

J., filed a dissenting opinion, in which STEWART and REHNQUIST, JJ., joined, post, p. 439 U. S. 200.